6.1 Further variance analysis

Question 1

Sales mix and quantity variances

Answer 1

• Takes the sales volume variance and provides more detail by splitting it into these two components
• In a multi product org where the products are related and substitutable, this can help determine the impact different products have on profits

Question 2

Steps for calculating the sales mix and quantity variances

Answer 2

Step 1 - The standard mix
Step 2 - Valuation
Step 3 - Sales quantity variance

Question 3

Step 1 - The standard mix

Answer 3

• First step is to compare the changes in the proportion of sales made up by each product
• This means determining what the actual sales for each product would have been if the sales proportions had remained unchanged - known as standard mix (shows change in mix)
• The actual total sales, in units, is split between the products based on on the originally planned proportions

Question 4

Step 2 - Valuation

Answer 4

• The next step is to determine the impact this change to standard mix has had on profits
• The mix and quantity variances are valued using standard margin (marginal costing = std contribution; absorption costing = std profit)

Question 5

Step 2 - Valuation - Two methods

Answer 5

• The individual units method
• The weighted average contribution method

Question 6

Step 2 - Valuation - Individual units method

Answer 6

• Each products variance is multiplied by the std margin
• Size of this impact is useful to so that management can further investigate why the change may have happened

Question 7

Step 2 - Valuation - Weighted average contribution method

Answer 7

• First step is to calculate a weighted average contribution for the products, based on budgeted sales and contribution
  = Total budgeted contribution / Total budgeted sales
• The weighted avg contribution is then deducted from the std contribution for each product, if positive then it generates a contribution above average, if negative it is below

Question 8

Step 3 - Sales quantity variance

Answer 8

• The sales qty variance ignores the changes in mix and focuses on impact on profit of selling more or less units than budgeted
• This gives useful info by explaining the impact on profits for the change in volume
• The difference between total actual sales and total budgeted sales is valued at the weighted average margin per unit

Sales qty variance = (Actual sales qty - Budgeted sales qty) x Weighted avg margin

Question 9

Reason for splitting into planning and operational variances

Answer 9

• Budgets are based on predictions about future revenue and costs
• Variances could therefore be due to unrealistic budget and not only operational factors
• The budget may need to be revised to enable actual performance to be compared with a std that reflects changed conditions
• This ensures managers are only being held accountable for elements of budget over which they have control

Question 10

Planning variances

Answer 10

• Measure the difference between the budgeted and actual profit that has been caused by external changes in the original std cost that may not have been known or acknowledged by std setters at time of planning
• It is the difference between the original (ex ante) and the revised (ex post) stds

Question 11

Planning variance results

Answer 11

• Favourable = Revised std cost is lower than the original std cost
• Adverse = Revised std cost is higher than the original std cost (original std underestimated cost and overstated expected profits)
• Uncontrollable = Variance is because the original std was not reflective of the attainable std (managers should not be held accountable)

Question 12

Operational variances

Answer 12

• Are assumed to have have occurred due to operational factors
• They are calculated by comparing the actual results with the realistic revised std (not the original std)

Question 13

Operational variance result

Answer 13

Is controllable by managers and they should be held accountable for the variance

Question 14

There must be a good reason for deciding the original std cost is unrealistic (not arbitrary aimed at shifting blame for poor results), such as

Answer 14

• A change in one of the main materials used to make a product
• An unexpected increase in price of materials due to a rapid increase in world market prices
• A change in working methods and procedures that alters the expected direct labour time for a product
• An unexpected change in the rate of pay to the work force

Question 15

Benefits of planning variances:

Answer 15

• More useful
• Up to date
• Better for motivation
• Assesses planning

Question 16

Problems of planning variances

Answer 16

• Subjective
• Time consuming
• Can be manipulated
• Can cause conflict